Sallie Krawcheck on Wall Street's Gentlemanly Groupthink

There’s a lot of focus on the fifth anniversary.For me, there’s a bit of an artificial nature to it. The difficulties started in 2007.

Any particular moment in 2007?In August, I was pulled out of a meeting by members of the Federal Reserve, asking whether we were seeing runs on our money funds. That was the “Uh oh, this is getting very serious” moment.

You stressed they weren’t as safe as cash. What about auction-rate securities? They looked safe until they imploded in 2008.We were not prepared for that, and our clients weren’t, either. I remember sitting at my desk when a report from the trading desk said they looked shaky. I didn’t have a pit in my stomach. It was a boulder. These securities were listed on brokerage statements as cash. Everyone treated them like cash. As they failed, we gave our clients zero percent interest rate loans.

Why did they need loans?I had clients calling me in tears, saying, “My daughter is supposed to get married next month. I need my money.” It’s very cold comfort that in the fine print it says this might not be cash. That was a mistake.

You’ve been cast as a casualty of the crisis.Look, the CEO [Vikram Pandit] and I had different perspectives on how to treat clients. When that happens with your CEO, the natural outcome is you have to go. Those are just the rules of the game.

In retrospect, would you do anything differently?I don’t know that there’s much I would do differently on [urging compensation for clients who lost money in] auction-rate securities. Are there different tactics I would have pursued to make my argument? Of course. If you tell people it’s cash, it better be cash.

We all look for people to vilify, but what you describe sounds less criminal than reckless.We’ve developed this narrative that it was all greed, that people should have known that this would happen. The other bit of conventional wisdom is that the CEOs who ran these places, if they weren’t evil geniuses, were unfit in some way. This one was aloof, that one smoked pot, the other one was a lawyer. All of them were very intelligent gentlemen. None fully saw it coming.

It’s interesting that you note they’re all “gentlemen.”It helps explain the groupthink. These were individuals who spent a lot of time together, looked at the same complex data, and came to the same conclusions. That was true for the management teams, rating agencies, accounting firms, you name it. A lot of them had similar backgrounds, and a lot were men.

Do you think it could happen again?I don’t know. My concern is that, for all the new regulations, we still haven’t gotten to some of the real risks out there, nor have we thoughtfully considered causes like groupthink. I’m pleased that we’re circling back to the question of leverage. None of this would have happened if the firms weren’t levered. None of it.